1 China’s economic downturn leads to rising social turmoil
China’s factory activity contracts in May
May 31
The PRC National Bureau of Statistics released data showing that China’s purchasing managers’ index fell to 49.5 in May from 50.4 in April, or below the 50-point mark separating growth from contraction.
The sub-indices for new orders, raw material inventories, employment, new export orders, imports, purchasing volume, and orders in hand all showed contraction.
Property sales in China continue to fall
May 31
China real estate information service provider CRIC released the following data for May and the first five months of the year:
- In May, the top 100 property companies in China saw sales decrease by 33.6 percent from a year ago to 322.41 billion yuan, compared with a 45 percent decrease in April.
- From January to May, the top 100 property companies in China saw sales decrease by 44.3 percent to 1.41 trillion yuan, compared with a decrease of 46.8 percent in April.
Cash-strapped local gov’ts show irregularities and problems
Utilities problems
May 20
Information circulating on Chinese social media said that the local authorities in Qingling Town of Yibin City in Sichuan Province had installed water meters in rice fields to charge fees.
May 30
Mainland media reported that farmers in Heilongjiang’s Tonghe County saw their annual irrigation fee rise from 200 to 300 yuan per mu to 600 yuan per mu after the local water affairs bureau contracted out the provision of water resources (melted snow from the mountains) to private entities. This led to dry fields and the missing of some spring planting as many farmers were unable to afford the increased fees.
Civil servants laid off
June 3
Information circulating on Chinese social media said that the labor arbitration team in Shanghai’s Xuhui District collectively applied for labor arbitration after the bulk of the team was “optimized” (i.e. laid off), leaving only one specialist for each street.
Strikes over wages and benefits
May 29 to May 30
Cleaners from the state-owned Shenyang Metro Group went on strike because their retirement pensions and other benefits were affected by the Group’s outsourcing of property management to private companies.
In the morning of June 3, the search term “Shenyang Metro cleaners angered due to social security payment interruption” trended on Baidu Hot Search.
Stability maintenance affected by fiscal shortages
May 31
Radio Free Asia reported that the CCP authorities in Beijing, Hunan, Guizhou, and other places had placed under house arrest dissidents, rights activists, and petitioners that they were monitoring ahead of the anniversary of the Tiananmen Square Massacre instead of sending them on “tours” across the country as was the usual practice around “sensitive” dates for the regime due to financial constraints and a lack of funds to carry out “stability maintenance.”
A woman in Beijing who wished to remain anonymous told Radio Free Asia that state security forces no longer participate in “stability maintenance” and the funding for “stability maintenance” work now comes from local street offices. She added that the local authorities can no longer afford to purchase train or plane tickets to send marked personnel on “tours.”
China sees a suicide wave
A review of mainland media and social media information show a recent spate of suicides by jumping off bridges in various parts of China. Local governments have responded to the trend by deploying guards on bridges and installing protective nets to prevent suicides. People interviewed by overseas Chinese language media and comments from Chinese netizens suggest that the suicides were due to people feeling desperate about the overall economic situation in China and seeing no way to continue living. Many business owners were among those who committed suicide.
According to incomplete information gathered from mainland media and social media:
- May 10 to May 24: At least 12 suicides from jumping off bridges occurred in Shanxi Province’s capital city of Taiyuan.
- May 16: A video circulating on Chinese social media noted that the people jumping off bridges in Chongqing City had become so numerous that the local authorities had arranged for firefighters on standby under bridges for rescue operations 24 hours a day.
- May 29: An employee of a tech company in Zhejiang’s Hangzhou City revealed that the local emergency management bureau had sought out their company to install “AI monitoring” devices on bridges. The bureau requested that the devices have algorithms to identify potential suicide cases and issue alerts. The Hangzhou emergency management bureau said that the highest recorded suicides by jumping off bridges was “27 jump attempts in a day.”
- June 3: A widely circulated video on Chinese social media showed a man wearing a security guard uniform sitting on the railing of a bridge as he prepared to jump into the river below. Multiple public security officers were spotted trying to dissuade the man. Netizens commented under the video that even the guards tasked to stop people from leaping off bridges are themselves preparing to commit suicide.
Our take
1. The drop in China’s PMI in May further affirms our observation that the Chinese economy is deteriorating and recovery is sluggish. China’s contracting PMI in May also aligns with the decline in other economic indicators like fiscal revenue, exports, and credit in the first four months of 2024.
China’s PMI data over the past year highlights the weakness of the economy. In the 17 months since the end of the “zero-COVID” policy in January 2023, China’s PMI was in the expansion zone for just six months, namely, January 2023, February 2023, March 2023, September 2023, March 2024, and April 2024. And of those six months, the PMI was only around 52 percent in February and March of 2023, while expansion remained below 51 percent in the remaining four months.
In contrast, the PMI in other Asian countries in May 2024 saw expansion, a development which partially suggests that supply chains could be relocating out from mainland China:
- Taiwan’s PMI in May 2024 was 50.9, up from 50.2 in April and the highest level since May 2022.
- Japan’s PMI in May 2024 was 50.4, up from 49.6 in April and the first return to expansion in nearly a year.
- South Korea’s PMI in May 2024 was 51.6, up from 49.4 in April and the highest since May 2022.
- Vietnam’s PMI in May 2024 was 50.3, unchanged from April and with input cost inflation hitting a nearly two-year high.
- The Philippines’ PMI in May 2024 was 51.9, down from 52.2 in April and with business sentiment being the most optimistic in nine months.
- Indonesia’s PMI in May 2024 was 52.1, down from 52.9 in April and with business confidence at the lowest in four years.
2. The sharp decline in home sales and the manufacturing sector downturn are having an impact on local government finances and the ability of local authorities to perform various governing functions. The struggles of local governments due to financial difficulties are reflected in areas such as their inability to carry out the usual “stability maintenance” work around the 35th anniversary of the Tiananmen Square Massacre, civil servant layoffs, the charging of arbitrary utility fees, and various irregular actions.
3. The recent uptick in suicides from leaping off bridges suggests that the Chinese economy is worsening much more than what official mainland media has admitted to thus far. This trend is also in line with what Xi Jinping had previously warned about, that is, economic risks are transforming into social and political risks for the CCP regime.
4. The early economic data for May suggests that China’s actual GDP for the second quarter of the year could be negative and the official figure that is eventually disclosed could be worse than expected. This will likely hurt foreign investors’ confidence in China’s economic recovery, accelerate the pace at which the United States and its allies impose sanctions on China, and reduce global economic dependence on China.
2 More signs of financial risks surface in China
Bulk of shrinking LGFV bond issuance used for repayment
May 30
China Chengxin Credit Rating Group published a report showing that local government financing vehicles (LGFVs) issued 804 bonds worth 564.721 billion yuan in April 2024, representing a month-on-month decrease of 18.03 percent and a year-on-year drop of 11.89 percent. Also, the net financing scale of LGFVs was negative 35.737 billion yuan in April, a month-on-month decline of 47.583 billion yuan and the first negative net financing this year.
Other noteworthy details in the report include:
- LGFVs involved in infrastructure investment and financing issued 778 bonds worth 547.091 billion yuan in April, a month-on-month decrease of 15.87 percent and a year-on-year decrease of 12.09 percent.
- The outstanding scale of all LGFV bonds reached 14.48 trillion yuan at the end of April, with the outstanding scale of LGFV bonds issued for infrastructure investment and financing totaling 14.03 trillion yuan.
- In April, 93.68 percent of LGFV bonds were issued solely for the refinancing of old debts, an increase of 2.47 percent month-on-month and with 14 regions reaching a 100 percent refinancing ratio.
- In April, the average issuance term of LGFV bonds increased from 3.70 years in the previous month to 3.74 years. The bulk of LGFV bonds issued were set to mature in five years or longer (44.83 percent), and retained the same proportion as the previous month.
- In April, LGFV bonds accounted for 81.88 percent of the bonds issued by municipal and county-level governments.
CCP authorities attempt to sniff out local gov’t hidden debt risks
May 31
Bloomberg News reported that the PRC National Association of Financial Market Institutional Investors said in a notice to some financial firms that it would like to check if any bond sales have added to hidden pressures among local governments. The notice added that underwriters had to submit reports with clear conclusions by May 30.
State asset manager focuses on central enterprise financial risks
June 3
The Party Committee of the State-owned Assets Supervision and Administration Commission (SASAC) held an expanded meeting to convey and study Xi Jinping’s important speech delivered at the 14th collective study session of the CCP Politburo.
Noteworthy points in the meeting include:
- SASAC officials should deeply implement the new rules for financial accountability (“Regulations on Accountability for Preventing and Resolving Risks [Trial],” 防範化解金融風險問責規定 [試行]), and revise and improve the financial business supervision system of central enterprises.
- SASAC officials should urge enterprises to implement rectification measures for each identified risk issue and firmly uphold the bottom line of risk prevention.
- Central enterprises are, in principle, forbidden to establish, acquire, or take new equity stakes in various financial institutions. Central enterprises are also not allowed to participate in or increase stakes in financial institutions with minimal support for main industrial operations and with a high risk of spillovers.
- SASAC officials are to strengthen risk prevention and control, and hold accountable those responsible for major risk losses due to violations or dereliction of duty.
Our take
The developments above suggest that financial risks are climbing in China and the CCP authorities are increasingly concerned about the situation.
1. The information in China Chengxin Credit Rating Group’s report indicates that LGFV bond risks are increasing and local governments have reduced capacity to make repayments as China’s economy deteriorates and the real estate downturn has yet to bottom out.
The plummeting scale of LGFV bond issuance suggests that financial institutions are becoming aware of the increasing risks associated with LGFV bonds and issuing such bonds is becoming tougher.
The Chengxin report’s observation that more than 90 percent of LGFV bonds were issued to refinance old debts and the increasing average issuance term suggests that local governments are struggling to pay off their debts in general and are being forced to continuously “borrow new to repay old” so as to put off the triggering of debt risks. Meanwhile, the detail about LGFV bonds comprising the bulk of the bonds issued by municipal and county governments indicate that debt risks are concentrated in regions with poor repayment capacity.
Perhaps more worrisome is the detail that nearly 97 percent of outstanding LGFV bonds are connected with local infrastructure investment and financing. As real estate prices in China see significant declines, such investments face a very high risk of default in the future.
2. The National Association of Financial Market Institutional Investors’ requirement that some financial companies check if any bond sales have added to hidden pressures among local governments suggests that the CCP authorities are concerned that local governments could look to address fiscal shortfalls by taking on more implicit debt as the Chinese economy deteriorates. Such actions by the localities will intensify risks associated with local government bonds and worsen the local government debt crisis.
3. The SASAC’s meeting requiring that central enterprises implement accountability for preventing financial risks is both an effort by the commission to adhere to the direction set in the Politburo meeting on May 27 and a reflection of the SASAC’s concern about the financial risks that might affect central enterprises under its management. The latter point is particularly pertinent for the SASAC because many central and state-owned enterprises have shifted from the “real [economy] to the financialized [economy]” (脫實向虛) in recent years by deviating from their core businesses and leveraging their financing capabilities and financing licenses to engage in financial arbitrage. This includes backroom operations like making “equity investments” that are really loan financing in disguise (明股實貸) to provide financing for some private financial institutions and private enterprises.
Central enterprises that forayed into “financialization” are likely to be affected by financial contagion stemming from the real estate sector crisis and the worsening of China’s economy in general.
